We are seeing a flurry of increasing interest in the whole subject of business succession planning. The reason is simple — demographics. In the context of the retiring baby boomers, as the authors of The Advisor’s Guide to Business Succession Planning point out: “Succession planning is not only becoming more important, it is also becoming more urgent.”
That is both good and bad news. On the positive side, financial advisors have a great opportunity to provide good counsel for their business-owner clients. On the not-so-good side, most business owners, including financial advisors themselves, are woefully uninformed and unprepared to deal with the transition from their life’s work to whatever comes afterward. Fortunately, publications such as this book can help by providing answers to the most common questions, as well as recommend specific tactics for maximizing the value of any transaction.
Authors Malcolm Scarratt and James Kraft address the major issues associated with business succession in an orderly manner.
They note that money and tax considerations, while often grabbing most of the attention of the parties involved, are seldom the determining factors behind the success or failure of a succession plan. Happily, the authors also emphasize the importance of having a team of experts from the legal, accounting, estate planning, investment and banking fields involved.
The book walks the reader through more than a dozen key considerations. The first is the identification of a potential buyer/successor — something most business-owners confess they haven’t really thought about.
The typical choices are current partners, employees, competitors, outside strangers and family members. Each group has its own advantages and disadvantages, depending on the situation.
The next few chapters address the circumstances under which a succession might be triggered. I found the one on “sale at retirement” to contain answers to many of the questions I hear most frequently. These include: “Should I buy/sell shares or assets?”
Another question has to do with how a deal is financed: the purchaser’s cash, bank loans or vendor financing. Although vendor financing is generally the least favourable for the vendor, it is the arrangement most frequently used in a service business, including the financial advisory industry.
Other chapters focus on a sale as the result of death or disability. As both situations involve an unpredictable event, the benefit of having adequate insurance protection for both of these contingencies is highlighted. I would have added at least one more “D” event to the list: divorce. Few things will complicate a succession plan like a decision to sell a business when the vendor is involved in divorce proceedings.
Special attention is given to the sale of a family-owned business, and deservedly so: all the evidence indicates that only a handful of family-owned businesses survive generational transfers. Non-financial factors, such as personal dynamics, cultural traditions and expectations of people other than the owner (especially in-laws) come into play in a family-owned business transition.
Although this book is ripe with tables illustrating the different financial outcomes associated with various approaches to succession, I was pleased to see that a significant amount of space is allocated to guiding business owners through some of the emotional deliberations that are essential to making informed choices. Questions such as, “What will I be doing after my business is gone?” are as important as the best arrangement for tax purposes.
There is a chapter designated for financial advisors who are — or should be — planning their own succession. Regrettably, advisors are no better than the general business-owner population in being prepared for the inevitable: that one day they will want to retire or, at least, slow down.
Given the intimate relationship that most advisors have with their practice and their clients, I believe this process can be even more challenging. Fortunately, the nature of advisors’ work equips them to make better financial decisions. By applying their questioning and listening skills to themselves and their personal situations, they should come out ahead.
This is the fourth edition of The Advisor’s Guide to Business Succession Planning. In addition to updating for changes in tax rules, it also contains a planning checklist that I found to be a comprehensive guide through the process.
Overall, I see this book as a valuable resource for advisors to keep handy for quick review, sample calculations and a reminder of the questions to be considered for successful succession. With the growing interest and activity in this area, this book could well become one of the most referenced on your bookshelf. IE